DP5614 Simulating Stock Returns Under Switching Regimes - A New Test of Market Efficiency
| Author(s): | David Meenagh, Patrick Minford, David Peel |
| Publication Date: | April 2006 |
| Keyword(s): | efficient markets, rational expectations, regime switching, stock returns |
| JEL(s): | C15, C5, G14 |
| Programme Areas: | International Macroeconomics |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=5614 |
A model of profits switches between four regimes with fixed probabilities; the rationally expected profits stream implies the stock market value. This efficient market model is not rejected by UK post-war time-series behaviour of either profits or the FTSE index.